Product Recall: Understand Your Policy, or Else

As with many developing niche insurance markets, the product recall market currently faces a potential crisis of confidence.

Losses are building, new regulations and political issues are impacting insureds, and pricing competition and wording creep are making the sector less attractive to insurers. There is a spate of client litigation cases linked to nonpayment of claims due to misinterpretation of policy wording, and other incidents linked to lack of clarity over claims triggers are seeing clients and prospects question the value of cover. Many brokers are concerned that client dissatisfaction with wording is making the sector more risky, and they are less keen to invest in expertise and grow their product recall teams.

So how do we learn from the mistakes of the past and avoid a potential market dislocation in the future?

Learning from Collective MistakesNearly all emerging insurance classes go through growth and loss cycles. Markets usually learn from their collective mistakes, reset policy language and pricing, and emerge stronger, larger, and more relevant to clients. The product recall market is no different.

In the late ’90s, AIG dominated in what was then a highly profitable, burgeoning market. CIGNA (ACE) then attacked AIG’s market dominance by offering higher limits, wider wordings, and attractive premium discounts. The inevitable result was that CIGNA got burned and exited the market. This exit, combined with resulting higher reinsurer costs, lowering of limits, and tightening of wording, saw a significant reduction in the size of the market in terms of numbers of policies written and premium income.

Since early 2000, the market has grown steadily, and today there are 15 markets, primarily based in London, with new capacity via Barbican and Apollo, recent Lloyd’s syndicates entering the market. Gross premium levels are probably in excess of $300 million, policy limits can be purchased above $200 million, and policy language is very broad.

In terms of policy development, once cutting-edge aspects of coverage have become standard and valued parts of recall policies. For example, rehabilitation of product covers the increased marketing costs incurred to help bring sales back to previous levels after a recall, and therefore can help to mitigate loss of profit claims for insurers. Despite initial concerns, insureds have not abused this clause through over-generous sales promotions funded by insurers, and it has benefited all parties.

Customer’s loss of profit (CLOP) is another example, which has become vital cover for private label manufacturers for large retailers. If these manufacturers damage a retailer’s image through contaminated or defective products, the retailer will expect loss of profit reimbursement, threaten, or delist the supplier. Offering CLOP has reduced far more significant losses to insurers and maintained retail trust in their supply chain.